I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

5 Costly Mistakes Emotional Investors Make in Wall Street

Emotional investors make decisions by impulse or hype. Their investments are fueled by irrational exuberance and irrational pessimism.

Of all the costly mistakes emotional investors commit, five stand out:

1. Overtrading, caused by overconfidence. Emotional investors systematically overestimate their ability to predict the next move in the price of different stocks, take short cuts, rely on stories rather than detailed data analysis; and end up taking excessive risks.

2. Staying in the market when asset valuations are high. Emotional investors end up riding an impending correction that swings valuations in the opposite direction, before restoring them to historical means, e.g., staying with stocks in 1985 and 1986, 1999–2000, 2006–2007, which preceded major market corrections.

3. Staying out of the market when valuations are low. Emotional investors miss impending market rallies that eventually revert valuations to historical means, e.g., staying out of the market in 1988–1989, 1992–1999, 2009–2013, when equity markets rallied.

4. Doubling down in a bear market, e.g., buying gold in the 1980s or Japanese stocks and real estate in the 1990s.

5. Selling winners and holding on to losers, also known as disposition effect.

The harmful effects of these five forms of investment behavior are well documented in behavioral finance literature. According to a study of 66,465 households possessing accounts with discount brokers for the period 1991–1996 (a bullish market), those who traded frequently earned 11.4 percent return, while the overall market gained 17.9 percent.

According to another study, investors who poured money into value stocks (value investing is associated with intelligent investing) over the period 1963 to 1990 earned a return of 18.7 percent for the following year, compared to 11.4 percent for the momentum stocks (momentum investing is associated with emotional investing). The overall return over a five-year period was 143.4 percent for value stocks and 81.8 percent for momentum stocks.

The bottom line: Investing with emotions can be harmful to your portfolio.

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